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The Apple Of China’s Eye

Buried in the market’s reaction to Apple’s (AAPL) first earnings miss in six years was an important number from its earnings report and an equally important comment by new CEO Tim Cook. The number was $4.5 billion, which was the amount of Apple’s fiscal fourth quarter sales from China. The comment by Cook was that China is now Apple’s largest market after the US. While traders and investors were busy selling off Apple stock to the tune of a 5 percent or more takedown, other investors might be busy thinking about the China numbers and Cook’s comment instead.

Fertile Ground

Apple generated $28.27 billion in total revenue, so the $4.5 billion from China sales represents 15.92 percent of its overall sales. This was a nearly fourfold increase in revenue from the same quarter last year in China. Apple has an online store in China and now has six retail outlets, which first opened in 2008.There are now 940 million mobile phone users registered in China, with growth showing no signs of abating.

Apple’s iPhone Entry Into China

Apple originally signed a three year deal with China Unicom (CHU) in 2009 to sell iPhones that year. At the time, China had just under 700 million mobile phone users, and this coincided with the unveiling of China Unicom’s 3G network. This was the only network at the time that had technological compatibility with the iPhone in China and gave Unicom a head start in the competition for the iPhone with its larger wireless rival, China Mobile Ltd. (CHL). Soon, China’s well known gray market already had an estimated 1.5 million iPhone users.

As the number of mobile phone users climbed over the 900 million mark in China, the Shanghai Daily reported at the end of June that Apple would announce a deal to sell the iPhone in the fall of this year through China Mobile. This deal was seen as necessary to further the growth for the iPhone in China, which is not just another opportunity for Apple, but has already become a critical market essential for the company to keep growing its sales, something Wall Street observers feared might slow down.

Resellers’ Delight, Consumer Demand

In conjunction with the gray market, there are plenty of unauthorized Apple resellers in China. Many of them found the iPhone 4S to be a bonanza. Although Apple launched the device first in countries other than China, some enterprising Chinese resellers were already selling the iPhone 4S for 10,000 yuan, or more than $1,500 US, roughly double or more than the retail price in authorized markets. While consumers in the US, Canada, Europe and Japan were already getting the authorized iPhone 4S, that wasn’t the case in China. The Chinese resellers paid scalpers or proxies roughly $100 to stand in long lines at Apple stores where the iPhone 4S was available, then these buyers would ship the phones through Hong Kong into mainland China. The rush to get the new phone from the unauthorized resellers meant that customers would not have access to after sales service, yet it didn’t seem to matter, as many of the sets were selling out.

Other Glitches

In addition to a bustling gray market, Apple has to face some other problems in China. A recent report by China Central Television, or CCTV, has focused on companies which are Apple suppliers in China that are suspected to have environmental violations. Apple has long used many suppliers to manufacture components in Greater China, which includes Hong Kong and Taiwan, even prior to selling its iPhones in China. The CCTV reported alleged corruption as well as pollution stemming from lax environmental practices. Water pollution and other problems were pointed out in the report, and up to 27 suspected Apple suppliers were alleged to have committed violations. Apple was accused of ignoring these practices. While Apple had no comment on the allegations, the supply chain for Apple’s products in Greater China was believed to be running normally.

Still Huge Potential For Apple

Despite the problems with suppliers and the ever present existence of the gray market, Apple’s future is bright in China. Apple plans to work with third party retailers who will continue to build the business in mainland China. The potential for Apple to expand its number of authorized resellers Apple currently has is still great. The potential to sell Apple products to the vast and still expanding Chinese market hungry for its goods that’s still enormous is there, so Apple needs to accelerate its presence. Apple’s CEO Cook acknowledged as much, and also said, “the sky’s the limit.”

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